Summary

Hani Sabra – Alef Advisory

2 conflicts driven regional instability in the past: Firstly, the role of Political Islam, with Egypt, Saudi Arabia and the UAE forming one bloc against another bloc of Turkey, Tunisia, the Muslim Brotherhood an affiliated group. Secondly, Iran vs Saudi Arabia confrontation, causing rifts and proxy conflicts in Yemen and Lebanon and Iraq, to a lesser extent in Syria in the last few years. Political Islam essentially over, having suffered numerous defeats. The US far less engaged in the region and countries in the Middle East, having seen the situation in Afghanistan, are starting to talk more; Qataris and Emiratis are talking, the Qataris and Saudis are talking, the Turks and the Egyptians are talking, the Iranians and the Saudis are talking indirectly in Iraq, leaving more stability in the region.

Several issues still exist, between UAE and Saudi Arabia as they pursue individual paths, leading to tensions over oil policy and in turn over economic policy and dominance. Another critical issue is the US and Iran re-joining the JCPOA, which Hani says is a 50/50 shot. If no deal arrives, US sanctions and a proxy conflict are likely to arise. Legitimacy of leadership was questioned, with Iraq and Lebanon clear examples. A decade on from the Arab Spring and the region is not in a better position.

Zekeriya Ozturk – iRes

Recent volatility in Turkish assets caused by underlying macro-outlook, including Turkey exhausting credit driven growth potential, and causing currency and inflationary implications. Erdogan, paranoid of losing power, will use resort to methods to increase the growth potential of the economy, with last weeks premature rate cut a reflection of that. 9.1% real GDP growth expected in 2021 and growth in 2022 expected to be 4.4% with external demand recovery the main driver, in particular tourism. Zek is positive on export performance and believes services revenues can close to 2019 levels however rising energy prices is a concern. A current account deficit of 2.5% of GDP is anticipated. The cut in rates was not justified and the markets negative reaction proves it is more a political decision than for market price stability. The currency outlook is weak, originating from low FX reserves and negative real interest rates. Looking forward, Zek cites the main issues as election pressures and the policy mistakes as a result.

In the banking sector, long growth is still reasonably positive. Credit card loans have been growing significantly more than other segments, pointing to fundamental weakness in household real disposable income.

Peter Attard Montalto – Intellidex

Peter focused on the ANC elections and climate. South Africa’s domestic climate agenda was negligible until the end of last year, as pledges were being made but nothing changing in the country. External and domestic pressure has built up on trade policy implications on a carbon border, with South Africa as one of the most carbon intensive emerging markets. Domestic factors, particularly issues around sulphur dioxide have arisen, with issues around communities raising the problems of decommissioning power stations and the poor efficiency of Eskom power stations. Politically, still not at the point of making net zero commitments by 2050, it is still an aspiration as this would be forcing the industry to change quicker than alternatives have begun to adapt. The real debate is around carbon envelopes and how you sequence the environmental vs social impacts. Forced financing by offshore investors is leading to social issues catching up and contradictory statements by the government on climate and COP26. Moving to the ANC issues and Ramaphosa’s super majority gained in Q2 after the Step Aside rule following corruption. There are still disagreements inside this broad coalition, towards access to rent, economic policies from the leftists and not moving quickly enough in reforming Eskom from conservative central-left. The problem emerging is there is nobody to overtake Ramaphosa, who can match his national reach, leaving the focus on the Deputy President position. The Policy Conference in the middle of next year will contest the social wage, basic income grant, broadening pension protections, SARB land, national health insurance and localisation policies, as well as contradictions in Ramaphosa’s economic narrative.

Christopher Granville – TS Lombard

The Ruble strength has been modest compared to strength in oil, natural gas and commodity prices, due to the entrenched political risk and geopolitical risk. The governments fiscal rule when oil price is above the pivot oil price set, excess oil tax is used to intervene in the domestic FX markets. Looking at macro, this year has seen 4.6% real GDP growth and Christopher expects 2.5% growth in 2022. This modest value is due to continued reinstatement of lost oil production volumes in the framework of the OPEC class agreement to persist until the middle of next year and secondly as the government will be directing considerable sums from a sovereign wealth fund into state led capital spending programs. Whilst COVID continues to have humanitarian consequences, it will not be an important factor for the economy and financial markets in Russia. Inflation is rampant, largely driven by seasonal factors in agriculture, but also many ominous structural drivers as well including the Central Bank’s dovish stance, amidst supply side concerns. The Central Bank is shifting its focus from conventional interest rate response in a conventional monetary tightening cycle to credit controls. Endorsed by President Putin, imposing administrative quantitative controls on consumer credits will be brought in to get inflation under control, which Christopher agrees is necessary but not enough.

The government is having to think about not only stimulating long-term potential growth, but the social and political pressures made worse by COVID. The result will be higher taxes on wealthier individuals and on certain key sectors. Taxation in the oil sector and other exporting sectors will become heavier which will lead to margins squeezing as oil and gas price booms come off. This will be necessary to support low-income households and bring stability to Russian society. Once policy orthodoxy prevails and the Central Bank controls inflation, there will be ride down the yield curve in local currency debt which should give returns in equities.

Menzi Ndhlovu – Signal Risk

Menzi focused on Zambia, Ethiopia and Mozambique. Beginning with Zambia, a country which has gone from chronic instability to a crowd pleaser. President Hichilema has masterminded an impossible electoral victory, drafting the blueprint for opposition politics. Since assuming office, there has been an overhaul of the country’s economy, beginning with disclosure of 14 billion debt. The Kwacha has been one of the top performing currencies in the world, and the last two bonds issued by the Central Bank have broken records in investors demand. Menzi believes Hichilema will continue in this trajectory, since he has remained consistent throughout his political career, he is well aware of the country’s economic constraints and also there is a lack of opposition from the Patriotic Front. There will be a robust fiscal policy with greater tendencies towards consolidation, but not too harsh as to excessively burden the Zambian populace. Hichilema will also look to resolve the crippling mining disputes and diversify the economy. On the diplomacy side, Menzi forecasts a more careful management of Zambia's relationship with China and the country could pivot slightly westwards.

Moving to Ethiopia, a country that has descended into insecurity, political instability and economic stagnation. In some ways Abiy Ahmed delivered on his promises but changes began mid-2019. His authoritarian slant is in response to challenges to his ideology and his regime and now rules with a doctrine of Pan-Africanism, a threat to ethnic federalism. Ethiopia’s instability has been exacerbated by other factors, such as tensions with Sudan which present another security risk and tensions with Egypt and Sudan over the grand Ethiopian Renaissance dam and intending towards greater authoritarianism. Menzi expects authoritarian capitalism going forward and for conflict to continue and spread to other regions, until international actors raise the cost of further escalation – only until then will Ethiopian stakeholders nudge towards peace. Ahmed will continue his reform agenda, prioritising the overhaul of telecommunications sector and privatising state-owned enterprises.

Lastly, Mozambique. Total and ExxonMobil have indefinitely deferred their ventures, leaving ENI as the sole LNG project and raising concerns over Mozambique's economic stability and ability to service its exceedingly high debt. Security is improving, as intervention to dislodge insurgents from key strongholds has allowed for the resumption of commercial activity. The government is sitting following overwhelming victory in 2019. Going forward, insurgency should move away from LNG areas to potentially commence with construction activity, possibly as soon as the 2022 / 2023 financial year.

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